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Creating a Backup Plan for Suppliers

Unionized labor strikes, hurricanes and political upheaval — any of these can bring a business’s supply chain to an unceremonious halt. Chinks in the supply chain have the potential to cripple an unprepared small business. But fortunately, there are steps international business owners can take to prepare for and quickly recover from breakdowns with vendors and suppliers in their supply chain.

Here are strategies that can keep a business’s doors open if a foreign vendor goes out of commission.

Don’t Wait Until Disaster Strikes

Business owners may want to make contingency plans before the vetting process even begins for primary vendors and suppliers, says John Krech, CEO and president of Minneapolis-based RightOn Inventory, which provides online inventory planning services. “When you’re dealing with vendors from outside the country, you don’t have a lot of time to react,” says Krech, who is a 25-year veteran of the international supply chain industry.

“The backup supplier should be from a different city and come in a different port if applicable, due to the natural disaster and labor dispute issues that can occur.”

— John Krech, CEO and president of RightOn Inventory

He suggests working with a backup vendor from the very beginning and splitting orders between a primary supplier that would do a majority of the work, and a secondary provider that would handle a small portion. In the unfortunate case that disaster strikes the primary vendor, the business would still be able to obtain products, even if it’s not able to run at full capacity. “The backup supplier should be from a different city and come in a different port if applicable, due to the natural disaster and labor dispute issues that can occur,” Krech says.

Stock Up on the Right Amount of Inventory

Having backup inventory can help a business meet customer demands while its vendors get back on track. Using supply-chain management software can help business owners find the right balance between preparing for disaster and over ordering.

Krech says some specific software providers include: Fishbowl, Sage, QuickBooks, RightOn, SAP and ACCTivate. Regarding what to look for in a supply-chain management software provider, he had the following tips:

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1. Does it save time and reduce the number of manual tasks?

2. Does the system distill key information so it’s easy to understand?

3. Does it have the ability to measure and track its value and your savings?

“The key is to leverage analytical tools that can determine the appropriate amount of safety stock — that determine the right amount to order at the right time from a financial and customer-service perspective,” Krech says. “Frequently, businesses rely on methods that are outdated and over invest in inventory or they decide to not invest in safety stocks because of poor information [and] analytics.” For example, Krech points out that the Economic Order Quantity (EOQ) is a widely used core algorithm in software packages, yet it was developed in 1913.

When purchasing backup inventory, a business can try to minimize extra costs by waiting until the foreign currency exchange rate is more favorable. For example, a Canadian house-ware importer could use supply-chain management software to determine that he needs a two-month backup supply of French vases. The importer knows — based on a euro conversion rate — that it would cost about €500 euros to purchase that many vases. The importer could sign up for market-rate alerts through an online FX service. When the rate improves to CAD/EUR 0.7780, the importer could use a trusted online foreign exchange service to convert $650 Canadian dollars into about €500 euros. This allows the importer to purchase the right amount of backup inventory, without overpaying due to unfavorable exchange rates from foreign currencies.

Determine the Appropriate Number of Backups

The number of backup vendors a business needs depends on how vulnerable the primary vendors are to supply chain disruption. Jeff Karrenbauer, president of INSIGHT, a supply-chain strategy and consulting firm in Manassas, Va., has been helping businesses with supply chain issues for 35 years. Karrenbauer says there is no magic formula to determine the right number of backup suppliers, but in general businesses should have at least two or three backup vendors. “It’s really a function of the company’s tolerance for risk,” he says.

Karrenbauer offers these questions to help small business owners begin to determine the risk of supply-chain disruption for each of their vendors:

· Does source material travel through a dangerous part of the world?

· Is the supplier in a developing country with an unstable government?

· How susceptible is the supplier’s location to natural disasters?

· How financially stable is the vendor?

The answers to these questions should inform the business owner’s backup plan, Karrenbauer says. The most important step an international business owner can take is to identify risks and formulate backup plans before disaster strikes. “It’s risk mitigation ahead of the storm,” Karrenbauer says.

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